As sustainable investing and environmental, social, and governance (ESG) ratings really start to take-off it is becoming clear that the real demand for social responsibility and sustainability data and disclosures is just beginning.
There are a whole bunch of organizations out there that collect public information about how well companies perform on material ESG issues like climate, employee compensation, and data security. One commonality among ESG ratings agencies is that they all rely on publicly available data to a large degree.
Corporate CSR/sustainability reporting and communications are central to the sources of public data used by ratings agencies. That means that type and quality of information disclosed through annual reports, and the accompanying communications strategy used to share important CSR/sustainability information are critically important to securing a strong ESG rating.
In some cases, the organizations that collect data on sustainability performance also attempt to rate that performance. Similar to financial performance, companies are also rated on their performance on ESG issues. Sometimes these ratings use numerical scales (e.g. 1-100), sometimes they use letter scales (e.g. AAA to CCC).
ESG ratings agencies use different methodologies for scoring companies on their CSR/sustainability performance. Some agencies offer limited transparency on their ratings methodologies, rely on different data sources to varying degrees, and involve some degree of subjectivity in assigning ratings. Academic research and market trends show clearly that ESG ratings are important to investors.
If you work for a large, publicly traded company, there is a good chance that your organization releases an annual CSR or sustainability report. If you’re reporting, there’s probably a good chance that you’re using the Global Reporting Initiative (GRI) standards. These reports can serve as the backbone of the public sources used by organizations that rate sustainability performance.
Aligning CSR/sustainability reporting and communications with ESG rating criteria has the potential to add tremendous value for companies. Companies that are more effective at aligning their CSR/sustainability reporting and communications with ESG ratings criteria should score better.
Better ESG ratings can lead multiple financial benefits for a company like lower cost of capital, as well as improved perceptions of performance from investors and the public. Additionally, the process of working to align CSR/sustainability reporting with ESG criteria can highlight important opportunities for improving corporate strategy and performance in materially relevant areas.
To help firms and their clients better align CSR/sustainability reporting and communications, Colin Price Consulting LLC has developed an ESG Optimization Framework. The framework uses a step-by-step process to identify credible and effective ways to align CSR/sustainability reporting and communications with ESG ratings criteria and methodologies.
Creating stronger alignment between CSR/sustainability reporting and communications should in turn strengthen the ESG ratings for a client. More about our ESG Optimization Framework in a future post.